1. 1 Venture Lending היבטים משפטיים של חברות היי- טק

2. 2 What is Venture Lending? Venture Lending could be any form of debt financing provided to a company which is venture backed financing. Venture Lending is provided by specialized banks or non-bank funds and used to fund working capital or equipment purchases. Venture Lending providers combine their loans with warrants, or rights to purchase equity, to compensate for the higher risk of default. Venture loans can provide a young company the extra time and resources needed to reach major product or customer milestones. SVB presentation: Venture Debt – Maximizing Its Value in the Current Environment, February 23, 2004

3. 3 Uniqueness & Advantages Venture Lending loans have an equity component. Therefore, it provides cash to companies with significantly less dilution than venture capital investment. Unlike traditional bank lending, Venture Lending is available to startups and growth companies that do not have positive cash flows or significant assets to use as collateral.

4. 4 Benefits of Venture Lending For founders More cash, less dilution. For Venture Capital funds Leverage of equity enables financing of company with less additional investment. For Venture Lending funds High interest combined with equity kicker.

5. 5 Risks Involved High-Tech companies have limited revenues and tangible assets. Value of intellectual property is limited upon liquidation. Relatively high chance for Borrower company to dissolve its businesses, reflecting on actual capability to repay loan through seizure of charged assets.

6. 6 Which Companies Typically Obtain Venture Lending? Backed by strong VCs Have cash in bank for 18-24 months of operation Achieved (initial) sales Enjoy strong management Concept: debt follows equity.

7. 7 Venture Lenders Target Investment Pre-Revenue Stage Company premier VC(s)/strategic partner(s) Significant market opportunity Credible exit opportunity Revenue Stage Company top line growth Exit visibility Troy Zander, DLA Piper LLP, Shenhav & Co. Venture Lending seminar, January 31, 2008

8. 8 Bank & Fund-Based Venture Debt (1) What do Venture Lenders care about: Funding Risk the risk that next equity funding will not occur Equity funding is viewed as a key source of repayment Investor and prospective investor support is critical Lenders also consider whether investors are on top-tier or qualified list Lenders past experience with specific investors can be critical Management Team and Business Plan Potential for development of valuable intellectual property Performance Risk the risk that the company will be able to perform according to its business plan. Different from typical bank/asset based lending which focuses on asset values, revenues, profits, cash flow. Other factors: management team, industry sector, product etc. Troy Zander, DLA Piper LLP, Shenhav & Co. Venture Lending seminar, January 31, 2008

9. 9 Why do lenders make these loans: Provides bank lenders with a hook for a valuable depository relationship following equity funding Equity-kicker or success-fee – gives the lender an equity like return and enables it to share in upside Steady payment of interest and amortization to reduce exposure Often gives lender right to invest in future equity rounds, to enable lender access to successful VC-backed companies Troy Zander, DLA Piper LLP, Shenhav & Co. Venture Lending seminar, January 31, 2008 Bank & Fund-Based Venture Debt (2)

10. 10 Why do companies take these loans: Liquidity and runway extension Less dilutive than equity or convertible debt Warrants are usually a small percentage of capitalization Need for cash when valuation at perceived low point Access to debt financing before traditional banks will pay attention Relationship with lender and introductions to venture community and strategic partners May be able to negotiate no financial covenants Troy Zander, DLA Piper LLP, Shenhav & Co. Venture Lending seminar, January 31, 2008 Bank & Fund-Based Venture Debt (3)

11. 11 Typical Deal Structure Loan facility of XXX M$ Company may drawdown facilities from time to time High interest rate (10-20% per annum) Warrant coverage (10-30% of loan) Commitment and other fees & penalties apply Collateral: Loan is secured by IP and other assets of the Company, granted as first priority charge

12. 12 Venture Lending Key Terms (1) Borrower entity (cross company Guarantees) Secured Guarantor – Borrower, its parent or subsidiary. Administrative Agent – lead Lender Lenders – leader alongside with some other banks and financial institutions as may be arranged by lead Lender Facility (or Term Loan) of several $MM Draw Period – normally Term Loan must be drawn at Closing (Advance), but certain transactions allow routine drawdown from time to time. Term – 24-36 months, while interest only for a defined period upon Closing.

13. 13 Venture Lending Key Terms (2) Interest – on the outstanding balance of the Facility, payable monthly at an annual rate (10-20%), fixed at the time of an advance. Fees – fully earned, non-refundable commitment fee, due and payable at Closing. Warrants – bearing similar terms as granted to other company Warrant holders, per latest investment round and with coverage of 10-30% of Term Loan. Prepayment Fee – Term Loan can be prepaid at any time, with fee dependant on Term Loan evolution. Security & Collaterals – First priority charges on IP and proceeds (Fixed, Floating, Negative); other specific Guarantees.

14. 14 Venture Lending Key Terms (3) Other conditions – certain VL funds require proceeds to remain in the US and to be repaid from a US entity. Information – Borrower required to furnish Lenders with financial statements. On some cases VL fund requests similar information as provided to companys Preferred Shareholders. Facility Costs – Due Diligence fees and other legal transaction costs all borne by Borrower. Exclusivity & No-Shop – Could reach up to 30-90 days from Term Sheet execution up to signing of loan documents.

15. 15 Israeli Venture Lending Market Venture Lending is customary practice for VC backed companies. Israeli banks in general are not active in this domain. Strong Venture Lending funds with Israeli presence. Several strong US players coming to the market.

16. 16 Key Topics to Consider in Israeli Venture Lending Transactions Structure of borrower (Israeli parent or Israeli subsidiary?) Security interest – perfection and priorities Approval or consent of third parties (OCS – מדען ראשי) Legislative Liquidation restrictions (OCS & others) Tax implications

17. 17 Structure Issues (1) Israeli High-Tech companies often opt for a Delaware parent – Israeli subsidiary structure (Israeli Related). In other cases, Israeli parent has an active US subsidiary. IP can be located in Israel or outside of Israel (developed in Israel under a cost plus agreement).

18. 18 Structure Issues (2) Is borrower the Israeli company, the US company, or co-borrowers? Is there a cross guarantee? Is there a security interest in IP (or only a negative pledge?) In any case pledge of shares of subsidiary (Israeli or US) should be considered.

19. 19 The Security Interest (1) Israeli law allows a fixed charge and a floating charge (latter not allowed under US law). Israeli law also provides for several statutory liens which have preference over a floating charge but come second to a fixed charge. No Account Control Agreement is available in Israeli banks.

20. 20 The Security Interest (2) Priority of liens under Israeli law: Fixed charge Statutory liens Floating charge Floating charge may have a covenant preventing the creation of fixed charges. Perfection – 21 days waiting period prior to funding.

21. 21 Statutory Liens include: Compensation payments (subject to cap of approximately $3K per employee) Amounts withheld for taxes and not transferred to the tax authorities Municipal taxes Government taxes (capped at one year) Other taxes (which are less than 12 months in arrears) One year rental payments The Security Interest (3)

22. 22 Warrant Issues Which class of shares (next round/previous round) Registration rights Preemptive rights, Right of first refusal Term Transferability Cashless exercise Automatic exercise prior to expiration

23. 23 Third Parties Chief Scientist Issues: Consent upon perfection of lien Consent upon sale of IP outside of Israel Special buyout formula Special exception for buyout formula in case of insolvency Investment Center

24. 24 Tax Issues Taxation of interest income. Taxation of warrants. Taxation of other fees and charges.

25. 25 היבטים משפטיים של חברות היי-טק